Operational Risk Capital

71 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Thomas Conlon

Thomas Conlon

University College Dublin

Xing Huan

University of Warwick - Accounting Group

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.

Keywords: Bank Regulation, Basel II, Measurement Approach, Monitoring, Operational Risk

JEL Classification: G21, G32

Suggested Citation

Conlon, Thomas and Huan, Xing and Ongena, Steven R. G., Operational Risk Capital (July 2020). CEPR Discussion Paper No. DP15096, Available at SSRN: https://ssrn.com/abstract=3661440

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

Xing Huan

University of Warwick - Accounting Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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